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Telephone giants accusing MCI of fraud say a primary reason they did not immediately detect the alleged call-laundering scheme is the industry operates on the honor system when paying each other to originate and terminate phone calls.

MCIs biggest rivals have accused the No. 2 long-distance phone company of bilking them out of millions of dollars in access charges by manipulating or abolishing call detail records and routing long-distance traffic over trunks only dedicated to carry local phone calls. The U.S. Attorneys Office and the FCC are investigating the claims.

Electronic signaling systems detect where traffic begins and ends. However, local phone companies often do not know from where a call originates so they rely on information from the long-distance provider in order to bill the IXC at the proper rate for routing traffic over their networks.

Theres always an amount of questionable traffic, says SBC Communications Inc. spokesman Dave Pacholczyk, referring to disputes over where phone calls originate, but much of this business is an honor system.

AT&T Corp., SBC and Verizon Communications Inc. claim MCI violated that honor code. Over the summer, following reports that the U.S. Justice Department had launched a probe into its call-routing practices, MCI said a preliminary internal investigation revealed no foul play.

MCI, the former WorldCom Inc., has called AT&Ts claims a ploy to derail its reorganization plan at a time when the Ashburn, Va., company was seeking to emerge from the largest bankruptcy in U.S. history.

Onvoy Inc., a telecommunications company accused of conspiring with MCI to cheat AT&T, also has repeatedly said it has done nothing wrong. AT&T claims MCI conspired with Onvoy to deceive AT&T into thinking phone calls destined for high-cost areas in the United States were placed from Canada, rather than their actual origin: the United States.

AT&T says it was paying millions of dollars in access charges to rural telephone companies when its archrival was responsible for footing the bill. According to AT&T, MCI was routing calls placed in the United States through Minnesota-based Onvoy along to Manitoba Telecom Services Inc. in Winnipeg, Canada. According to AT&Ts complaint, Manitoba would route the calls to Bell Canada. Since Bell Canada had a bilateral relationship with AT&T to exchange traffic from the United States to Canada, and vice versa, AT&T would carry the traffic into the United States. AT&T says it was frequently handing off traffic to independent rural telephone companies that charged high access fees.

If MCI scammed its archrival out of millions of dollars as AT&T claims  spokesmen for the U.S. Attorneys Office and the FCCs Enforcement Bureau say they cannot comment on pending investigations  it is unclear why nobody raised a red flag when millions of minutes of traffic were going from the United States to Canada and back.

AT&T spokeswoman Claudia Jones says the phone company had no reason to suspect foul play. There is an unspoken rule of conduct that companies in the industry operate above board, Jones says, and so we had no reason to think that anyone was putting their calls on our trunks so we could pay the cost.

MCI says its routing practices are legitimate. Partnering with a company such as Onvoy to find the most economical route to carry a phone call, say MCI executives, is a common industry practice  not fraud. Onvoy, a leastcost routing company, leases the networks of other telecommunications providers and directs traffic on that path to deliver calls on behalf of its customers  MCI and other phone companies.

Onvoys agreement to terminate the traffic was not a ruse premised upon disguising the origin of the traffic but a transparent contractual undertaking presumably based upon termination rates that AT&T had agreed to with Bell Canada, MCI stated in a filing with the U.S. Bankruptcy Court.

However, MCIs competitors allege the bankrupt phone giant made a concerted effort to conceal where calls were originating. Verizon and SBC both allege MCI manipulated or removed the call detail records, including the ANI. SBC also alleges MCIs long-distance traffic was terminated over trunks designated for only local traffic.

Randy Milch, senior vice president and deputy general counsel with Verizon, says MCIs actions represent a long-standing effort … to evade the payment of access charges.

Kathryn Lovik, an Onvoy spokeswoman, says Onvoy interconnects only with carriers that have SS7 capabilities throughout their network and can guarantee the call detail record is preserved throughout the transmission of a call. If there is a glitch in the records on a particular circuit, We would troubleshoot that all the way to the root cause and eliminate that, she says.

In a letter to former WorldCom Inc. chief John Sidgmore dated July 3, 2002, a top SBC executive said his company had disputed data WorldCom had provided regarding what percentage of WorldCom traffic terminating on the Bell network had qualified at interstate rates, versus the more expensive intrastate rates.

Stanley Sigman, who is now the president and CEO of Cingular Wireless, said if the dispute went to arbitration, We believe the evidence will demonstrate that MCI has avoided the payment of millions of dollars in tariffed rates and will represent another instance where a WorldCom company has significantly understated its true operating cost.

Nine months later, WorldComs new chief, Michael Capellas, received a letter from John Atterbury, SBCs Group President of Operations. Atterbury reiterated the concerns of his predecessor.

MCI/WorldComs general failure to accurately report and route traffic, including the provision of accurate signaling information, has led to … the corresponding gross underpayment to SBC of tens, if not hundreds, of millions of dollars of traffic compensation by MCI/WorldCom on an annual basis, Atterbury wrote. SBC believes that many of these accounting irregularities are ongoing despite our successful attempts to address some of them on an interim basis.

Atterbury later called on Capellas to follow procedures to ensure accurate reporting, which includes the transmission of accurate signaling information with a telephone number correctly reflecting the location of the calling party.

In a letter dated June 4, 2003, MCI executive James Lewis told Atterbury MCI disagreed with the claims, but the companies were near agreement on procedures for reporting call routing information. About a week later, Atterbury replied to Capellas: Mr. Lewis response does not address or refute the importance of traffic accounting, and glosses over other traffic accounting concerns by focusing solely on the limited portion of the traffic exchanged between our companies that has been the subject of our prior attempts at amicable resolution.